As homebuyers look for opportunities in the real estate market, a new price-to-rent ratio from researchers at Florida Atlantic University and Florida International University sheds light on which metropolitan areas might see price growth or declines in the United States.
Areas with higher price-to-rent ratios, such as the West Coast, are more likely to face future price instability, or declines, according to the BH&J National Price-to-Rent Ratios. However, areas in the U.S., like the East Coast, with lower price-to-rent ratios should see far more stability in property prices, or potential growth.
“Low price-to-rent ratios strongly suggest higher average returns to ownership,” said Ken H. Johnson, Ph.D., real estate economist with FAU’s College of Business. “Thus, low price-to-rent ratios suggest it is better to own than rent on average in a particular market, and it is this increased demand for ownership that helps property price performance. The opposite is true for high price-to-rent ratios, which indicate renting on average is preferred to ownership and implies weakening demand, leading to less stable property prices.”
The monthly index, conducted by Johnson, along with researchers Eli Beracha, Ph.D., of FIU’s Hollo School of Real Estate and William Hardin, Ph.D., dean of FIU’s College of Business, looks at the 100 most populated metros in the county and calculates the number of dollars in property price paid for each dollar in annual rent. Generally, a lower price-to-rent ratio, under 15, suggests that prices are stable and likely to grow. A higher price-to-rent-ratio, over 20, implies prices in the area are unstable due to lowering returns to ownership.
Cities in California and on the West Coast have some of the highest price-to-rent ratios in the nation. San Jose, California is 35.24; San Francisco, 29.52; Seattle, 25.96; Los Angeles, 24.95; Portland, Oregon, 24.40; and San Diego, 23.07.
“It is not surprising prices, until recently, have been falling quite significantly with property values down over 9 percent in the last 12 months in San Francisco,” Beracha said. “In general, once prices start to fall, they should do so until the local current price-to-rent ratio roughly equals the local historic average price-to-rent ratio.”
Many East Coast metros are showing signs for future price growth: Atlanta’s price-to-rent ratio is 15.65; Springfield, Massachusetts, 15.52; Orlando, 15.36; Tampa, 14.52; Cape Coral, 14.90; and Miami, 13.47.
“Cape Coral is producing one of the strongest buy signals in the country,” Johnson said. “It’s current price-to-rent ratio of 14.92 is below its historic average, suggesting a significant return to ownership for the area. Miami metro’s price-to-rent ratio, combined with the area’s population influx and new household formation rate, implies the area should see stable price performance. The greatest threats to pricing in Miami are a significant decrease in mortgage rates, which would reignite prices, and a rapid increase in supply of new units, which could send prices tumbling.”
All three researchers have some concern over the apparent slowing population growth in South Florida, which could present problems down the line for price performance. Expected population growth has slowed noticeably: The tri-county area of Miami-Dade, Broward and Palm Beach is expected to see only a 6.8 percent expansion in its population over the next decade, while Orlando is anticipating an expected population increase of 22.5 percent, according to StatsAmerica.
“However, that is a problem for another day,” Hardin said. “Right now, we are still dealing with an inventory shortage that is helping to create a major housing affordability problem across Florida.”
Source : FAU